Global stocks drop on recession and central bank rate rise worries

US and European stocks slid on Monday as the outlook for large global economies darkened, with tech shares hit hard by fears that the Federal Reserve will adopt a hawkish tone at a central bank summit this week.

Wall Street’s tech-focused Nasdaq Composite gauge fell more than 2 per cent, with streaming company Netflix dropping over 6 per cent.

Amazon, Tesla and semiconductor giant Nvidia also lost around 3 per cent, as concerns mounted over higher interest rates reducing the value of future cash flows and earnings.

“The Nasdaq is the epicentre of interest rates uncertainty in the stock markets,” said Julian Howard, lead investment director at GAM. “[The Fed] is talking up hawkishness, which is making the market quite nervous. The job isn’t done [on inflation].”

Wall Street’s broad S&P 500 index was down 1.6 per cent by the late morning in New York, after snapping a four-week winning streak on Friday.

The market gyrations in the US in recent weeks have been propelled by hedge funds closing out bearish bets and traders on Monday warned that the recent expiration of a large block of options on Friday could amplify volatility in the days ahead, as it did at the start of the week.

In currencies, the euro dropped almost 1 per cent against the dollar to $0.994, slipping below $1 after hitting parity with the greenback in July for the first time in two decades. Worries over possible Russian energy supply cuts led European gas and power prices to surge on Monday, adding to fears that the continent could slip into recession.

The regional Stoxx Europe 600 equity gauge closed 1 per cent lower, with Germany’s Dax down 2.3 per cent.

The growing sense of economic gloom comes ahead of the Fed’s annual gathering in Jackson Hole, Wyoming, which the central bank often uses to make big policy announcements. Fed chief Jay Powell is expected to signal that the central bank will continue to aggressively increase interest rates as it battles elevated inflation.

“I wouldn’t bank on Powell giving a strong signal at Jackson Hole that he’s ready to change direction on inflation,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. “[He will] justify why they are raising rates so fast and why they have to.”

Andrew Hollenhorst, economist at Citigroup, echoed that sentiment, saying: “We continue to expect a relatively hawkish speech from chair Powell at Jackson Hole on Friday.”

He noted that US Treasury yields and the dollar have both been rising recently, as investors shift to expecting a more powerful Fed policy tightening even after the US inflation rate ticked slightly lower in July from June.

The policy sensitive two-year Treasury yield traded at 3.33 per cent on Monday, from around 2.5 per cent in late May and less than 1 per cent at the end of last year. Meanwhile, the dollar added 0.9 per cent on Monday and has climbed almost 3 per cent this month against a basket of half a dozen major currencies, nearing the two-decade high it reached in July.

Global developed market stocks had rebounded strongly in July following a historic first-half rout and were still up for August as of Friday’s close. However, many investors have called into question the durability of the recent rally given the powerful economic headwinds that are expected for the remainder of this year and into 2023.

“I’m not buying into this relief rally. I think we’re in for more downside for risk markets for the rest of the year,” said Jamie Niven, a senior fund manager at Candriam.

Elsewhere, mainland China shares bounced on Monday after the People’s Bank of China slashed its mortgage lending rate for the second time this year, in an effort to support its debt-laden real estate sector. The CSI 300 gauge of Shanghai and Shenzhen-listed stocks closed up 0.7 per cent.

Additional reporting by Eric Platt in New York